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Caisse, CPP deny interest in new run at BCE

While speculation mounts about a hostile Telus Corp. bid for Bell Canada parent BCE Inc., a losing consortium and one of its erstwhile partners denied any interest in making another run at Canada's largest telecom company.

By Ross MarowitsCanadian press

Tues., July 3, 2007

MONTREAL – While speculation mounts about a hostile Telus Corp. (TSX: T) bid for Bell Canada parent BCE Inc. (TSX: BCE), a losing consortium and one of its erstwhile partners denied any interest in making another run at Canada's largest telecom company.

The Canada Pension Plan Investment Board consortium, which includes U.S. private equity firm Kolberg Kravis Roberts & Co., said it has no plans to resume its fight for BCE.

"We have no intention of submitting anything else at this time," CPP spokeswoman May Chong said on behalf of the group.

A similar line was proffered by Canada's largest pension fund manager, which withdrew from the consortium before it submitted a bid.

"It would be surprising that we submit another bid or take another run at BCE," said Caisse de depot et placement du Quebec spokesman Gilles Des Roberts.

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Cerberus Capital Management, which also submitted a failed bid, declined to comment.

Even as the Ontario Teachers consortium appears to sit in the cat's seat on acquiring BCE, industry observers are divided on whether telecommunications arch rival Telus will actually enter the fray.

Some believe Telus can yet structure an attractive bid that appeals to institutional and retail investors alike.

Others peg the likelihood of a counter bid as being low, with the probability of success registering below 25 per cent.

Troy Crandall, a telecom analyst with MacDougall, MacDougall & MacTier said he believes Vancouver-based Telus could win by tailoring its bid with a cash offer and a tax-free rollover of shares.

The combination could assuage the expressed fears of long-time retail investors who have complained loudly about paying a large capital gains tax bill.

"This would help relieve a lot of that capital gains tax if it were to come to fruition," he said in an interview.

Crandall believes Telus can ultimately boost its earnings in 2009, even while paying up to $50 per share, including the $800 million breakup fee.

"I think a bid between $45 and $49 by Telus would still give Telus a fair amount of operating leeway," he said.

The view is based on the assumption that Telus maintains the vast majority of the new company's wireless assets. That's far from certain since critics fear the new telco needs to be reigned in to prevent it from dominating the market.

Telus declined requests for an interview.

BCE chief executive Michael Sabia kept the door open to a potential bid from his rival.

"To the extent that a genuinely superior proposal comes forward that overcomes the sign anti-trust issues that exist on that front, of course our board will be open to it," he told television business network BNN.

Sabia defended BCE's strategy of maximizing shareholder value by ensuring there were three competitive bids to choose from.

He said it was heavily interventionist to ensure a level playing field would produce that result in Canada, which has a relatively small equity base.

That produced complaints from bidders, including three that withdrew from the process.

"There was lots of noise surrounding this process but let's not confuse noise with results and the results speak loudly – a 40 per cent premium," Sabia said.

BCE shares rose by 2.28 per cent to $41.26 Tuesday in the first Canadian trading day since a $51.7-billion takeover deal led by Ontario Teachers' Pension Plan was announced over the weekend.

The $42.75-a-share offer would give Teachers a 52 per cent stake in the company, with U.S. backers holding smaller pieces of the pie, according to an announcement Saturday.

Providence Equity Partners will have 32 per cent, while Madison Dearborn keeps nine per cent and unnamed Canadian investors will hold the other seven per cent.

DBRS maintained on Tuesday its rating for BCE and Bell Canada under review with negative implications. The rating agency believes the transaction could add $26 billion of debt to the BCE capital structure.

Fitch Ratings downgraded the company to BB- from BBB+ on the assumption that leverage will materially increase after the transaction closes.

Analysts Jeffrey Fay of UBS and Greg MacDonald of National Bank Financial are both more doubtful about a hostile Telus bid.

Although it knows the approved $42.75 bid price by Teachers, Telus has other things stacked up against it, Fay wrote in a report.

He estimated Telus could pay up to $46.75 including the break fee.

"But our view is that pursuing a BCE-Telus deal at this time is difficult to support for both companies primarily because of the regulatory risks and substantial break and reverse break fees."

MacDonald said Telus could only pay up to $44, assuming they keep all of the wireless business.

"Though a Telus hostile is possible, we do not consider it highly probably given the significant all cash premium, and the regulatory and other due diligence limitations would have," he wrote.

Iain Grant of SeaBoard Group said the any alternate bid would have to fall within a high $40s to low $50s range to be successful.

"We have all the ingredients for another horse race," he said, noting the available funding and apparent interest by Telus.

A special shareholders vote on the Teachers bid is expected to take place in late fall, with the deal closing in early 2008.

Just buying Bell Canada's parent isn't the only financial investment. The new owners would have to spend $10 billion to $20 billion over five years to rebuild the entire network to bring fibre into consumers' homes, he said.

Meanwhile, Crandall questions whether Telus could partner with private equity interest and buy into its approach of leveraging its conquests. During its brief involvement in the BCE file, Telus said it would maintain an investment credit rating.

"I think private equity and Telus would have competing interests, especially on the debt side. Private equity tends to want to rip things apart and sell off the assets," Crandall said.

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